6. Early last year you purchased 500 shares of Mrs. Davis Cookie Company, Inc. (
ID: 2724961 • Letter: 6
Question
6. Early last year you purchased 500 shares of Mrs. Davis Cookie Company, Inc. (Stock symbol CC). You paid $62 per share. The current stock price is $85 per share. You do not want to sell your stock but you want to protect all of your unrealized gain ($23). You believe that the stock may continue to rise by another 4% - 5% and you want your portfolio to benefit from any such price gains. The following options (puts and call) with July expirations are available.
Devise a strategy using options from the above table that is appropriate, given your parameters. Provide a drawing/graph that depicts that strategy.
calls
PUT
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
calls
PUT
Strike
Premium
Strike
premium
82.5
5.75
82.5
1.05
85
4
85
1.40
87.5
2.45
87.5
2.85
90
1.40
90
5.30
92.5
.70
92.5
8.15
95
0.32
95
12.65
Explanation / Answer
stock 500 purchase price 62 Current stock price 85 unrealised gain 23 calls PUT Strike Premium Strike premium Strategy Unrealised gain realised gain 82.5 5.75 82.5 1.05 hold 10975 85 4 85 1.4 hold 10800 87.5 2.45 87.5 2.85 hold 10075 90 1.4 90 5.3 sell 11350 92.5 0.7 92.5 8.15 sell 11175 95 0.32 95 12.65 Hold 5175
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